The Tax Advantages of a Home Office

A home office can provide valuable tax deductions, but home-office entrepreneurs often fail to take advantage of them. Keep in mind that home-office expenses—except for real-estate taxes and mortgage interest, which are fully deductible on your individual tax return—can be deducted only against income from the business. In other words, those expenses cannot be used to create a business loss to offset other nonbusiness income.

Essentially, if you have a 250-squarefoot den used exclusively as your office in a 2,500-square-foot house, you can claim as a business exi>en.se 10 percent of your mortgage principal, maintenance CO repairs, utilities, insurance, security system, and depreciation on your home. If you are renting your home from someone, you can claim 10 percent of your rent. Expenses of a home office are generally deductible if the office is used regularly and exclusively either as the owner's principal place of business or as a place for meeting with clients or customers the normal course of business.

If the owner doesn't meet with clients at home, the office must be the "principal place of business." But that definition is not always clear. In a case before the U.S. Supreme Court, the question is whether a spare bedroom was the principal place of business of an anesthesiologist who worked in three hospitals but used the bedroom to make telephone calls to patients and other doctors and to keep his records.

Fbf those operating exclusively out of their home, however, their home office is without question their principal place of business. The hardest part of the test for most People is the "exclusivity" requirement. The room or even a portion of the room must be set aside exclusivelv for the husiness (unction. The space cannot be nsed tor other things. If there is a rollaway bed or a television in the room. the IRS might challenge the home office deduction. If possible, have a separate number for the phone in that room. Set up a separate bank account, and keep records of all income and expenses pertaining to the home office. Also keep a detailed calendar or log of meetings with clients and time spent in the office.

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